Hickey says end the property tax break

August 24th, 2008 at 1:35 pm by David Farrar

Bernard Hickey in the HoS calls for an end to being able to deduce investment property lossess off your personal income tax:

It is the elephant in the room of New Zealand politics. Everyone knows it, yet our leaders refuse to address it, partly because they and their generation benefited personally through the massive house price inflation it created.

I’m talking about the abuse of the tax system by property investors that has allowed them to establish various types of trusts and loss attributing qualifying companies (LAQCs) that make losses on investment rental properties to reduce their personal income tax bills.

This was among the major reasons for the property investment frenzy of the past six years that drove house prices to unaffordable levels and has now created the conditions for a bursting of that bubble.

It would be good to see some hard data on how much of the price increases can be credited to the tax treatment, and how much to land supply etc.

The Department of the Prime Minister and Cabinet wrote a report on house prices and affordability in March. It showed landlord numbers rose more than 100,000 to 300,000 in the decade to 2006. The report estimates the $149 billion of rental property generates a tax benefit of at least $700 million for property investors, with the potential for up to $1.8b of tax benefits.

The Reserve Bank has asked the politicians to consider ring- fencing these investment property losses to remove some of the hot air pumping up the housing bubble.

But there isn’t a politician addressing the issue seriously.

Well I doubt anyone wants to lose the 300,000 votes such a move would result in.

Could such a change be grandfathered in? That would be inequitable but possibly the only way politically to do it.

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62 Responses to “Hickey says end the property tax break”

  1. arkhad (68 comments) says:

    Houses have on average doubled every 10 years since doomsday records were kept. Sure there have been cycles within those cycles but it is hard to believe that such a long term trend has all been the fault of investors.

    And it must be remembered in the New Zealand context that well in excess of 90% of rentals are owned by by mum and dad investors who have one or at most two investment properties and are primarily motivated by not wanting to be dependent on the state for penions in their old age. You can’t have it both ways!

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  2. peterwn (3,277 comments) says:

    The other issue to consider is whether removal of this break will drive people away from private landlording. If a significant number of dwellings are removed from the rental market and are occupied by those who would oherwise buy new, the Government would soon have a serious housing problem on its hands.

    There is another aspect – while it is easy to ‘ringfence’ salaries in this way, a small business owner-operator is very likely to be able to get away with it depite legislative changes. Such a person can decide how much she draws in salary v dividends.

    Yet another aspect and one that is frequently forgotten. Assuming population growth, the housing market is set by the cost of developing land and building new houses. The value of ‘undeveloped’ land is a small portion of the cost of a new house especially as everyonee wants to clip the ticket from the time the surveyor gets his theodolite out of his ute until the new owner receives the keys.

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  3. Razork (375 comments) says:

    Excellent in our time of over taxation, lets find a way to knock back investors trying to get ahead.

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  4. freedom101 (505 comments) says:

    This would be a very stupid time to change the tax laws. People who have chased the property rainbow are about to make some substantial losses. If the law was changed now (and not back dated), they would get their tax free gains locked in, and if they then sold their houses to another entity at today’s market prices, could claim capital losses on the way down!

    Much better to announce now that the law, if it was to be changed, would take effect from say 1 April 2010. I guess it’s only a matter of time before Labour, or Labour-Lite announce this.

    Everyone knows that the overinvestment in housing has been driven by the desire to escape over-taxation, so the best solution of all is to cut top income tax rates, thereby removing the tax advantage of housing. If the top rate was 20% instead of 39% people could get on with working out to to invest in productive capacity rather than adjusting their investments to defeat Dr Cullen’s rich prick impost.

    Of course, only the ACT party has a policy which would actually deal with the problem – 20% top rate.

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  5. Redbaiter (13,197 comments) says:

    Wrong approach. Right one is to offer even better tax breaks in other areas of the economy.

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  6. MajorBloodnok (361 comments) says:

    As others (including Bernard Hickey) have alluded, the 39% tax bracket is a primary contributor to the residential investment bubble. Who is responsible for that? Why Labour, of course, as one of their first measures on being elected in 1999.

    As a less hysterical approach to encouraging less investment in property and more investment in the productive sector, I suggest:

    – remove the 39% bracket (ideally with a strategy to keep lowering tax rates)
    – apply capital gains tax only to properties that a bought and resold within a short time frame (eg 3 years?)
    – remove impediments to investing in shares (eg improve transparency for company accounts, remove capital gains tax if shares in one company are kept longer than, say, 3 years — to match the property investment rules, etc.)

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  7. labrator (1,850 comments) says:

    We should be encouraging investing as much as possible and housing is a legitimate investment. However as others have noted the playing field is staked in favour of housing due to lack of transparency and fair taxing mechanisms which, along with cheap credit, has created a housing bubble which is starting to burst. A lot of “investor landlords” are about to lose a lot of money and won’t ever go back into investing in housing in their lifetime. NZ needs to get more educated in ways to diversify their investments outside of housing and finance companies.

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  8. tom hunter (4,899 comments) says:

    When living in the US I had no problem accepting that there was a Capital Gains tax had I sold a rental property (only in as far as I accept any tax). This was in return for the following:

    – such a tax applied to other investments in the same way and is taken into account with total tax level, so the ordinary taxpayer really does not see it explicitly.
    – the interest on the home mortgage was tax deductible, but not on rental property. Made a big difference to the tax take and home affordibility – not to mention the fact that “fixed” mortgages in the US mean fixed for 15 or 30 years (your choice).

    Of course one must note that even with all this tax fiddling the US housing market has been even crazier than NZ. In short – not really a solution

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  9. baxter (893 comments) says:

    Politicians like H. Clark who have purchased many houses to enrich themselves from the wrought they have created will ensure that the status quo remains.

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  10. JC (958 comments) says:

    “It would be good to see some hard data on how much of the price increases can be credited to the tax treatment, and how much to land supply etc.”

    I can’t answer that, but there’s good evidence of the unintended consequences of the 39 cent tax here:

    http://tinyurl.com/6b477b

    Basically, the additional tax rate pushed people to react rationally and change their situations to create companies and majorly into trusts, as well as put their money into housing, all to avoid additional tax.

    These tax avoidance measures have the effect of reducing visible household savings, which allows the Govt to claim we need retirement schemes like Kiwisaver and various other semi compulsory schemes which, ironically, invest off shore. Then the Govt claims that the private sector isn’t interested in PPPs and infrastructure development has to be entirely funded by the tax payer which means more tax.

    It’s all an unholy circle of the Govt sucking up most of the economic activity and dominating and controlling investment that closes off the country and distorts tax and investment decisions.. Romania (circa 1989) of the South.

    JC

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  11. Ed Snack (1,883 comments) says:

    Hickey is rather ignorant. First it costs cash to run an LAQC to get any significant tax write off, depreciation alone is rarely enough on a house, and even themn it is recovered on sale. Second tax law already covers buying and selling to make a capital profit as a business, one has to hold on for a very significant period to be certain of escaping the possibility. And as many have pointed out, without the 39% rate, much of the extra incentive goes. What really drove up house prices was the cost of building new ones, and what drove that but more and more regulation. Prices can be demonstrated to rise most whenh there is an increase in population plus a plethora of rules that drive up new house prices.

    But let’s attack the “rich pricks” again, People who want to accumulate capital and be less reliant on the state are the natural enemy of the left, they cannot so easily be coerced into voting for Labour and similar parties. This campaign is purely political and driven by spite and envy, the staples of the labour hierarchy.

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  12. Tauhei Notts (1,724 comments) says:

    Freedom101 at 2.10 p.m. real good.
    Ed Snack; you have been unfortunate to mix with uninspired accountants.
    I saw the unusual situation of a spinster (she hates that term) on $100,000+ with a heavily mortgaged LAQC home who puts her savings into a Portfolio Investment Entity, rather than pay off the mortgage. The mortgage interest, and there is plenty of it, is 39% deductible. The PIE income is only taxed at 30%.
    The 39% envy tax creates so many weird opportunities because it is a stupid tax raised by an art teacher who knows as much about tax as I know about Manet and Monet.

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  13. Barnsley Bill (983 comments) says:

    michael cullen and this labour regime will be remembered as the patron saints of mum and dad rental property buyers. His eat the rich tax hike back in 99 was a major contributor to the massive property boom of the last few years. Those with the brains and wherewithal bought rentals as a lazy way of growing their equity.. And having the govt fund it for them too. Nice.
    Of course deification may stumble if they all wake up to the fact that his spending has killed it for everybody.

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  14. georgebolwing (870 comments) says:

    Two separate issues get conflated very quickly in these debates: the level of taxation (which is driven by the level of Government expenditure) and the “best” way to gather the required level of taxes, which is itself a complex mix of equity and efficiency.

    We would all be much better off if the Government did two things:

    a) stop taxing us to simply give back the money in the form of goods and services, commonly known as churn. Limit the government to true cases of public goods (defence, courts etc), looking after the truly poor and let the rest of us get on with our lives;

    b) raise the relatively small amount of revenue required to fund the remaining small government left by the simplest, most transparent means available, which in practical terms is New Zealand’s current GST.

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  15. PaulL (5,987 comments) says:

    If we were concerned about tax treatment of rental property, we shouldn’t remove the ability to deduct losses. All businesses can deduct losses against income – to do otherwise would be absurd, and would be just about impossible to enforce whilst opportunity remains to restructure your investment property to look like a trust or a company – and still get the deduction.

    A better idea would be to apply tax to the other end. No business can afford to make a loss year on year (or, at least, if you are, it isn’t really a business – it is a hobby like a vineyard or a cafe). The only reason people do this with property is that they are making hidden gains in the capital value. Like any other company, the totality of the returns should be considered for taxation purposes – including the capital gains. And, of course, a capital gains tax is even more electoral poison than doing something about housing affordability. That is, doing something about housing affordability other than bleating and wringing your hands, which has a good electoral payoff. But if you actually made houses more affordable – reduced the value of the largest asset of most NZers – you would be out on your ear quick smart.

    How about we do a thorough taxation review all in one go (the Australians are). Reduce top and middle income tax rates, institute a low income threshold, bring capital gains properly into the taxation net, introduce a carbon tax, get a proper deduction regime that encourages investment (such as an R&D deduction).

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  16. Owen McShane (1,226 comments) says:

    The international studies by Demographia (which include the 51 states of the US which are individual nations in terms of tax policies)
    show that tax regimes have little correlation with the size of the housing bubble.
    Every state and nation with Smart Growth policies has extremely unafordable housing. None of the affordable housing states and nations did. Simple as that.
    These so called tax benefits are only worth taking in a highly inflating market.
    Same with blaming “landbankers” for the land shortage. There is no point in land banking if the costs of holding land exceed the inflation of capital value.
    Get rid of the restrains on land and the massive speculative gains (and losses when the bubbles burst) and all these side issues disappear.
    In most US states housing mortgage interest rates are tax deductible but this does not drive the housing bubbles.
    The effects are just noise when compared to the differences in supple and compliance costs.

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  17. Zarchoff (100 comments) says:

    I agree with Ed Snack – Hickey is ignorant. I own 3 separate companies and all of them a LAQCs – only one of them invests in property; the other two are commercial trading entities that have nothing to do with buying or selling or renting/leasing property. You cannot take away the LAQC structure just for properties – eg what if an LAQC company has income from property leases/rents plus other trading activities. It is a case of LAQC for all or not at all! Also, for all the misinformed, talk-back junkies the only tax you get back under an LAQC regime is tax you have already paid. You cannot get a tax refund from other peoples tax – you have to pay PAYE (say from a salaried job) in order to get any refund under an LAQC. If you make a loss on an LAQC but haven’t paid tax during the year you get a tax credit. These tax credits are lost (i.e. not transferable) as soon as you elect not to be an LAQC (which can be a major disincentive to be an LAQC) It only works if the LAQC makes a loss (eg due to depreciation etc). As soon as an LAQC company makes a clear profit the LAQC regime becomes a hassle. Seeing as how the LAQC structure has been around during booms and busts I hardly see that this structure is the major driving force behind recent property price increases. Final point: yes, you can rack up losses due to depreciation which can be used to offset PAYE taxation BUT when you sell a property the depreciation claimed is clawed back by the IRD. That is unless you can prove the property is worth the same as the value you have depreciated it to – which is a fantastic trick to pull off given recent increases in property values.

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  18. Bob (497 comments) says:

    I don’t agree with singling out one industry for refusal of a tax break. What of an equipment hire company or car lease? They can also borrow for capital and claim the interest against income. The fairest way is a capital gains tax which no party seems keen to implement. Investors are always being accused of fueling house price rises but they also provide rental homes for people when State Housing can’t cope.

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  19. side show bob (3,660 comments) says:

    This problem was created by the years of socialism and governments that see personal wealth as something to rape and pliage, the gravy sucking bastards. The only safe investment in NZ has been land ( they don’t make anymore of it) and the house that goes on the said land. We have been taken to the cleaners in the belief NZ is seen as an equal society and all are looked after from cradle to grave, these are fine ideals but the chickens are comming home to roast as there has been a rather large cost to all these fine ideals and someone always has to pick up the tab. Those with more then two brain cells have invested in their own homes as it has been clear that the state does not have the ablity to look after them in their later years. Any investment that involves personal wealth ( cash ) is seen as fair game, for fucks sake the greedy bastards tax childrens bank accounts.

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  20. Southern Raider (1,831 comments) says:

    Exactly SSB. Its all about incentives. If you raise the tax and people perceive they are paying to much they will find away around it.

    Personally I can’t what until National releases the Infrastructure Bonds.

    I think this is a great idea, reasonable return for the low risk, pride in investing in your countries future and good for the financial terms of trade as the money’s not going off shore.

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  21. Gooner (995 comments) says:

    Hickey is ignorant.

    The ability to offset losses against personal income tax is a red herring from the LAQC point of view. You can own the property in your own name and do the same thing: removing the LAQC status has nothing to do with it.

    LAQC’s are set up for two reasons, neither of which is relevant to tax deductions:

    1. to avoid depreciation clawbacks when the property is sold (the shares of the LAQC are sold to family trusts usually and the property is not sold);

    2. creditor protection.

    Tax setoffs are a very secondary reason.

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  22. JC (958 comments) says:

    In Seattle house prices are sky high because regulations on land use are sky high as well. In Houston, house prices are low in comparison because they use their land base to relieve housing pressure. In different parts of the world, net household savings are directed into infrastructure/growth/productivity, in others it’s into the stock market/housing/dodgy finance companies.

    Seems to me that NZ falls into the second category because we have limited investment opportunities in a country literally dying for want of infrastructure opportunities. Who the hell wants to invest in the Northern Motorway via their taxes as opposed to Downer/NZ Govt offering investment via a PPP?

    To me, the choices are relatively simple. In a small country we can’t afford to *not* mix Govt, the private sector and tax payer income into our infrastructure. I’ve little patience for extremes of Statism or rampant capitalism and no patience for Govt run schemes like Kiwisaver. I want a four lane highway on SH1 from North to South with a minimum 40 year life, super fast broadband in the most congenial mix to 100% of people, feeder lanes of high and durable quality to SH1 and important markets, deep ports that take 100-300,000 tonne shiploads instead of 30,000 tonnes, daily media reports on improvements to productivity, claims that every Olympic gold medalist got his inspiration here, that native NZ fertility exceeds Ireland by a considerable margin, that 30 new churches are established each year decrying the explosion of materialism, that Catholic priests were deflowering more girls than boys.. and the girls were stoutly defending them, that headlines on job losses said “145 people have new opportunities” and that Helen Clark was appointed Ambassador to all hajib wearing countries.

    JC

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  23. Anthony (796 comments) says:

    JC is correct that the US property bubble is not everywhere in the US, and a lot of places property is much more affordable than here in hicksville NZ. In some ways the situation here is therefore worse, and the tax situation has contributed to driving the prices higher. Just listen any property investor repeat the mantra of how the tax man helps pay the mortgage, and gains are tax free.

    It is a myth that we need tax breaks to encourage landlords since nearly all of them purchase existing properties, so they don’t actually increase the supply of houses at all – just drive the prices up! Also, I have nothing against people making a buck but those who enter a business with the objective of making a gain but never paying any tax deserve to have the rules changed on them.

    And in fact the gain made by most landlords (well, when they make a gain) should already be taxed as the tax law says if the property was purchased with one intention of the purchase being to make a gain, then the gain is taxable. The trouble is that is difficult to prove and case law has limited the situations where IRD has any chance of winning.

    Tax advisers love the current law precisely because it is unclear and taxpayers need reassuring they will not fall foul of it. Bernard Hickey is absolutely right to call it the Elephant in the room.

    There are various ways to correct the current situation – some which may be able to be implemented without too much negative publicity.

    It is so ironic that this current Labour government has resisted trying to correct the tax advantages accruing to landlords, and therefore let house prices become more unaffordable to working class people than at any other time since the Labour Party was formed!

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  24. Anthony (796 comments) says:

    If property investors weren’t helping to drive the property boom they would have stopped buying when rental yields dropped below interest rates? On the contrary, it seemed the poorer yields got the more people joined the bandwagon. Sound familiar?

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  25. Anthony (796 comments) says:

    JC is correct that the US property bubble is not everywhere in the US, and a lot of places property is much more affordable than here in hicksville NZ. In some ways the situation here is therefore worse, and the tax situation has contributed to driving the prices higher. Just listen any property investor repeat the mantra of how the tax man helps pay the mortgage, and gains are tax free.

    It is a myth that we need tax breaks to encourage landlords since nearly all of them purchase existing properties, so they don’t actually increase the supply of houses at all – just drive the prices up! I have nothing against people making a buck, but those who enter a business with the objective of making a gain but never paying any tax deserve to have the rules changed on them.

    And in fact the gain made by most landlords (well, when they make a gain) should already be taxed as the tax law says if the property was purchased with one intention of the purchase being to make a gain, then the gain is taxable. The trouble is that is difficult to prove and case law has limited the situations where IRD has any chance of winning.

    Tax advisers love the current law precisely because it is unclear and taxpayers need reassuring they will not fall foul of it. Bernard Hickey is absolutely right to call it the Elephant in the room.

    There are various ways to correct the current situation – some which may be able to be implemented without too much negative publicity.

    It is so ironic though that this current Labour government has resisted trying to correct the tax advantages accruing to landlords, and therefore let house prices become more unaffordable to working class people than at any other time since the Labour Party was first elected!

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  26. expat (4,050 comments) says:

    what red says – incentivise other forms of saving

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  27. PhilBest (5,125 comments) says:

    Owen McShane (346) +4 Says:

    August 24th, 2008 at 4:57 pm
    “The international studies by Demographia (which include the 51 states of the US which are individual nations in terms of tax policies)
    show that tax regimes have little correlation with the size of the housing bubble.
    Every state and nation with Smart Growth policies has extremely unafordable housing. None of the affordable housing states and nations did. Simple as that.
    These so called tax benefits are only worth taking in a highly inflating market.
    Same with blaming “landbankers” for the land shortage. There is no point in land banking if the costs of holding land exceed the inflation of capital value.
    Get rid of the restrains on land and the massive speculative gains (and losses when the bubbles burst) and all these side issues disappear.
    In most US states housing mortgage interest rates are tax deductible but this does not drive the housing bubbles.
    The effects are just noise when compared to the differences in supply and compliance costs.”

    GO TO THE TOP OF THE CLASS, OWEN McSHANE.

    Look, all this waffle about investors and speculation and tax rates, is just dancing around the edge. NZ is 1.4% urbanised. GET THAT – ONE POINT FOUR PERCENT. So much for the hysteria about ‘concreting over the counytryside”. We could fit another 1 million people at the population density of Christchurch, by moving to 1.6% urbanised – i.e., a 0.2% increase. There is more land being used in DEER FARMING than there is in urbanisation. There is more land being put into lifestyle blocks than there is being added to our urban boundaries.

    How THICK do people, especially politicians, have to be, to be unable to see that this must have an effect on land values? And there is a flow-on effect on the housing construction industry. Not only is our urban land several times more expensive than that in Houston, Dallas-Fort-Worth and San Antonio, but our building industry cannot match theirs for efficiency.

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  28. Glutaemus Maximus (2,207 comments) says:

    ‘The Point’ in Acacia Bay, Taupo is more expensive than Cheshire, UK per square.

    How does that work?

    66m people on a smaller island, well paid footballers, good industry, and 600k immigrants a year.

    The tax laws in NZ have had a huge influence on property prices, as well as overseas investors.

    NZ was fast approaching being more expensive in the mid range than London.

    That is just sick, and bad and wrong!

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  29. PhilBest (5,125 comments) says:

    arkhad (6) +14 Says:

    August 24th, 2008 at 1:55 pm
    “Houses have on average doubled every 10 years since doomsday records were kept. Sure there have been cycles within those cycles but it is hard to believe that such a long term trend has all been the fault of investors……..”

    Arkhad, generally house prices have gone up somewhat in a relationship with incomes. But as soon as land supply is restricted, land goes up faster than incomes, and the “bubble” effect kicks in. On average, our parents could buy a house with about 3 years average income, but it costs us 6 years. What happens in a market like this, is that at some point, first home buyers drop out of the market altogether, investors follow, and the bubble starts deflating. Because there is a bubble effect, the swings up and down are much wilder.

    I can’t understand why an intelligent commentator like Bernard Hickey has left out of his reckoning, land supply restrictions. There is almost certainly an unholy alliance, even if unspoken, among politicians, local bodies, investors, and the finance sector, to keep the lid on this issue and keep obfuscating so that there is no groundswell movement among the young and lower income earners to demand that the injustice that is being done to them in denying them affordable housing, be addressed.

    It is all very well for councils to say that unused residential-zoned land represents “X years supply”, when all this land is, of course, owned by developers who are asking prices for it that the young and lower income earners cannot afford. Yet the cost of RURAL land beyond the urban boundaries (and that is not already affected by the “land banking” phenomenon) works out around $10,000 per residential section if it could be bought by a co-operative of young and lower income earners. But guess what? In Texas, residential sections DO sell for around the same value as if they WERE “rural” land; there is no inflation in value between the different uses.

    I think that if only our young, and lower income earners, KNEW this stuff, we might have a revolution on our hands.

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  30. PhilBest (5,125 comments) says:

    Glutaemus Maximus (167) +0 Says:

    August 25th, 2008 at 9:23 am
    “‘The Point’ in Acacia Bay, Taupo is more expensive than Cheshire, UK per square.

    How does that work?

    66m people on a smaller island, well paid footballers, good industry, and 600k immigrants a year.

    The tax laws in NZ have had a huge influence on property prices, as well as overseas investors.

    NZ was fast approaching being more expensive in the mid range than London.

    That is just sick, and bad and wrong!”

    Glutaemus, you too? You know that this is sick, and bad and wrong, but you can’t see that NZ’s urban zoned boundaries being 1.4% of the country, for 4 million people, might have something to do with it?

    Here’s another statistical poser for you. 4 Million people who live in a Texan metropolis, and who earn TWICE AS MUCH as we do, on average, are sitting on land HALF the value of ours. Get your head around that.

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  31. Mr Dennis (348 comments) says:

    PhilBest:
    “Look, all this waffle about investors and speculation and tax rates, is just dancing around the edge. NZ is 1.4% urbanised. GET THAT – ONE POINT FOUR PERCENT. So much for the hysteria about ‘concreting over the counytryside”.”

    Yes, the proportion of the total land area of the country is low. But much of the country is covered in mountains, poor agricultural land and completely unsuitable for housing. Cities traditionally formed where there was good horticultural land to provide food for the population, generally on the floodplains at the mouths of rivers. As Christchurch expands (I am unfamiliar with the other cities but presume similar situations exist), the new houses cover the best horticultural land, at Marshlands and other places. This peaty soil is incidentally not very good for housing, foundations are better on stony well drained soil.

    We need more land for housing. But we shouldn’t cover the best agricultural land to do it. The satellite town of Rolleston, near Christchurch, is an excellent example of what we should be doing. Rolleston is sited (intentionally I believe) on very poor agricultural land – horrible stony soil that hardly produces anything without irrigation. This land is ideal for housing, as you can put solid foundations down and it won’t flood either due to the good drainage. This land is much cheaper than horticultural land on the town fringes too, due to its poor productivity.

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  32. Mr Dennis (348 comments) says:

    I agree with others that we shouldn’t seek to end this tax break – we should be giving more tax breaks, not less. At present however only investment properties qualify for the tax break.

    The Family Party would make the tax system work for first home buyers too, by giving first home buyers exactly the same tax benefits as investors currently receive. We have a lot of other policies to help families into their first home, more info here:
    http://www.familyparty.org.nz/policy/Housing

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  33. Keithw (4 comments) says:

    Laudible Ideals Mr Dennis but aren’t you just creating anomolies where they don’t already exist –
    You, the first home buyer, who aren’t running a business, can have a tax break but I, who is running a business, can’t.
    (well I can actually because I personally offset my rental losses from my personally owned rental properties & my LAQC owned rentals, but as has been pointed out, if I haven’t paid enough tax, I don’t get any extra back.
    In the end I only get to reclaim 30% of the actual cash loss that I have made.
    As an accountant pointed out to me some time ago- I had better be getting capital gain on those properties or I am rapidly going backwards. Why would I choose to stay in that position otherwise ?

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  34. uk_kiwi (74 comments) says:

    “Houses have on average doubled every 10 years since doomsday records were kept.”

    A tired old myth perpetuated by real estate agents- historically house prices may have nominally increased, but in real terms they have kept fairly constant as a ratio to incomes and rents, i.e. the overall price level has risen at the same rate.

    http://www.dpmc.govt.nz/dpmc/publications/hpr-report/hpr43.jpg

    Notice the sharp inflection point around 2002, when prices rose from just over 4 times income to well over 6 times! This is clearly unsustainable. What we have seen in the last 5 years is a textbook speculative bubble, where yield on investment was considered unimportant because “housing always goes up”, you could get a tax break subsidy from the government to speculate, with no capital gains tax payable if you lie to the IRD convincingly. Wild west finance companies didn’t help either.

    Housing is not just another business- why should families trying to put a roof over their heads compete with speculators getting subsidised by the tax system? This is morally bankrupt.

    It would be interesting to see if the massive speculation in existing housing stock is the cause of NZs low productivity growth, as it has crowded out useful investment.

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  35. PhilBest (5,125 comments) says:

    UK KIWI:

    “…..the sharp inflection point around 2002, when prices rose from just over 4 times income to well over 6 times! This is clearly unsustainable. What we have seen in the last 5 years is a textbook speculative bubble, where yield on investment was considered unimportant because “housing always goes up”, you could get a tax break subsidy from the government to speculate, with no capital gains tax payable if you lie to the IRD convincingly. Wild west finance companies didn’t help either.

    Housing is not just another business- why should families trying to put a roof over their heads compete with speculators getting subsidised by the tax system? This is morally bankrupt.”

    What do you mean, “just over 4 times income, to well over 6 times”? Even the U.N. regards 3 times as a norm to be aimed for if the young and lower income earners are not to be denied their “right” to home ownership.

    Look, the only reason that this ratio ever goes above 3 times, is restricted land supply. Investors and speculators are the same all over the world. Yet in the only regions of the world where the ratio has been kept down around 3%, land supply adequacy is the deciding factor. All the other “big government” tinkering with tax structures and partial state equity and developer mandates and so on, are just “pissing into the wind” as long as land supply remains constricted.

    An interesting case is Germany, where the funding of the regions from central government revenues, is based on formulae that are powerful incentives for the regions to attract population and development, not to stifle it.

    And Mr Dennis, we are talking about such small amounts of land in the overall, that would make an enormous difference to home prices. There is more land being used in DEER FARMING than there is in urbanisation. There is more land being put into lifestyle blocks than there is being added to our urban boundaries. Germany manages to keep the inome to house price ratio around 3 times even though they are 15% urbanised. (We are 1.4%).

    You would think that politicians might be interested in studying how this is achieved. But I suspect that home owners, who of course outnumber potential first home buyers, get warm fuzzies from the escalating values of their own properties, (and it looks on paper like a good, booming source of investment collateral), so that there is no electoral traction to be had from offering any practical policy that will actually help the first home buyers of the future. (You can throw money at them now to buy their votes but that will worsen the demand-driven bubble problem and become increasingly expensive for the taxpayer to provide to future generations of first home buyers).

    I will not mince my words when I say that this is an inter-generational betrayal. People who bought their homes back when building houses for people was regarded as an admirable objective, and they were cheap and plentiful, are now looking at nice little retirement nest eggs because their house is now “worth” a million dollars. Too bad if their grandchildren won’t EVER own their own home, and too bad if those grandchildren have no option but to rent all their lives, and too bad if the rentals that those grabdchildren are trapped into paying, are also a previously unthinkably high proportion of their incomes. All so that the older, lucky-to-be-on-the-home-ownership-gravy-train people can enjoy THEIR capital gains and THEIR nice views and nice neighbourhoods and the town belts and open fields that surround their urban areas.

    Sorry, but we need a revolution, with the young and lower income earners awakened to this betrayal. But I expect that a lot more misguided policy will go under the bridge yet before the real problem gets addressed. Expect government bribes of potential first home buyers. Maybe when we have had several housing bubbles, and the government’s budget is groaning under the burden of assisting first home buyers into homes that cost around 20 years of average income, the real problem might get looked at.

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  36. RRM (9,933 comments) says:

    Speculators/rich pricks who own 8 rental properties and make huge tax-free capital gains on their investment impact hugely on the price of housing; keeping hardworking, wage-earning would-be first home buyers out of the market by keeping the price of the average mortgage well above the means of the average wage-earner.

    And they are encouraged to do this by a tax structure that sees them laughing at anyone who has their money in a term deposit or ANY other form of investment that does incur tax.

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  37. Keithw (4 comments) says:

    and your point is ???

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  38. Mr Dennis (348 comments) says:

    PhilBest: “And Mr Dennis, we are talking about such small amounts of land in the overall, that would make an enormous difference to home prices.”

    I agree, that was a minor point. My main point is that it is better to build on land that is poor for agriculture and good for housing, rather than expansion onto poor housing and prime agricultural land as usually happens at the moment. Low prices are a minor bonus.

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  39. Owen McShane (1,226 comments) says:

    We are a nation of gardeners and so if you force people to live on poor land make sure you invest in the trucking companies that will deliver the good topsoil.

    And productivity of land has little to do with fertility of the soil. Grapes, olives and truffles are not productive on “highly productive soils”

    Land is not productive. Only people are productive.

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  40. RRM (9,933 comments) says:

    Also Wellington (for example) has not built a new satellite suburb/city like Porirua or the Hutt for a long time. While a lot of the planning seems to be focussed on avoiding urban sprawl of the existing cities, this tried and true large scale alternative does not seem to have been implemented for a long time now.

    I would like to see a new motorway that runs over a Wellington Harbour bridge, from Miramar across to the coast south of Eastbourne, then straight into a tunnel under the Wainuiomata hills that comes out on the flat land near Lake Wairarapa. Over there another huge flat semi-independent city like the Hutt could be built, with a motorway and commuter trains over the bridge and thru the tunnel back to Wellington so that large numbers of people people can continue to work there until the new town finds its feet.

    In the event of a major earthquake disaster, this would also provide another route into & out of the capital…

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  41. insider (1,028 comments) says:

    Tell you what RRM, if you think it is so good an idea, put up your own money for it. YOu’ll be a rich rich man if it works out. If you want the taxpayer to fund it, that tells me it’s not as good an idea as you suggest.

    I also question the survivability of such a tunnel in an earthquake

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  42. Owen McShane (1,226 comments) says:

    Actually it matters not whether the tunnel survives an earthquake or volcanic eruption or tsunami – panicking people don’t like driving into tunnels. And with good reason. During a panic heaps of people leap into cars with no gas in the tank, and stop in the tunnels where they are hard to remove.
    Elevated highways got the people out of New Orleans.

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  43. uk_kiwi (74 comments) says:

    Maybe a better option would be to finish the Hutt motorway right to Upper Hutt, build a road tunnel through the Rimutakas to open up the Wairarapa. This would also be megabucks though. The train service could be improved too, it is apparently jam packed with commuters escaping high house prices.

    As a matter of interest there is apparently a depression-era road tunnel to Wainuiomata from Seaview that was never completed, anyone know anything about this?

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  44. Mr Dennis (348 comments) says:

    Owen, even on thin soil once you place the topsoil you removed to build a house on the back lawn you end up with a nice area of deep soil, plenty for a good vegetable garden. But even when they have good soil, most people just buy their vegetables anyway.

    And the soil type matters immensely, if you want to have a market garden. Sure there are a few things that do well on what would normally be considered poor soil, but I wouldn’t try growing carrots in gravel.

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  45. PhilBest (5,125 comments) says:

    Mr Dennis, I know you’re a good guy, one of the best on Kiwiblog. BUT:

    “Low prices are a minor bonus.”

    I disagree. They are the MAIN REASON for freeing up the supply of land.

    Here are some excerpts from “Footing the Bill for Green Space” by Richard Stroup.

    “If you live in Two Dot, Montana, open space is easy to come by. A grassy field with a dome of blue sky above is just down the street. And if you leave town for three months or six months or even a year, that open field will still be there when you get back, just as you remember it.

    But if you live in a fast-growing city that is pushing its boundaries and spilling into the surrounding countryside, chances are open space is harder to find. One morning on the way to work, you pass an empty lot overgrown with bushes. A week later, you drive past a major construction zone, soon to be a supermarket and discount drugstore. Not only has undeveloped land for parks, greenbelts and open space become scarcer, but it has also become more expensive.

    Those of us who have enjoyed this outdoor space without paying for it— and I am one— hate to see any of it disappear.

    Of course, we can move to the new kind of residential development that is beginning to show up near these cities. They provide green space and wildlife habitat, and guarantee residents that this open space will always be there. Such developments are expensive, since they incorporate space that could be used for more houses. One example is Eagle Rock Reserve outside my hometown of Bozeman, a rapidly growing Montana university town. Each buyer purchases 20 acres, but 17 of those acres are set aside for wildlife habitat. Homes are built on 3-acre lots nestled in the woods and meadows. These homesites sell for about $150,000.

    Another way that city governments can provide open space is buying land for public parks. Citizens gain enjoyment and scenery, and pay with their property taxes. Most of us think that this is a good trade-off.

    Yet there are other ways for the city government to preserve green space without paying money for it. These ways are not so honorable.

    Around the country, two major approaches are being tried. Some towns and cities simply take what they want by zoning land as green space and forbidding development on it. That is just as costly as buying parks, but the cost is borne by fewer people: specific landowners, future purchasers of housing, and renters. (Renters suffer as rents are driven up by the reduced supply of land and housing).

    The larger number of current homeowners and landlords reap the benefit. As housing and other building space rise in price, current owners get a double windfall: more green space and higher property values.

    Other cities are trying a newer technique (sometimes in addition to zoning green space). They are imposing “impact fees” on the builder of new housing or business space.

    Impact fees take cash from owners of land that is to be developed, as well as from new buyers of space, and from renters (whose rents rise as they do with zoning). The cash goes to the city, which may use the money it took to purchase green space. Or it may use it for something else, such as planning services, property tax reductions, or whatever the politically powerful interests in the city want to use it for.

    The effect on owners of existing homes and business buildings is, again, a windfall gain. Their buildings are suddenly worth more since they don’t have to pay the new impact fee. New homes will cost more as a result, and growth will proceed more slowly. The city does not reduce the costs of green space but loads them onto a minority, including those not yet present to vote.

    Some current residents support impact fees because they feel that without them they would subsidize the development of roads, sewer lines, and parks as their town or city grows. In most cases, they would not, because bonds are issued to cover the costs, and the tax revenues from the development will cover these bonds………..

    Unfortunately, zoning green space and imposing impact fees seem to be gaining ground. As a homeowner in a town whose government favors an impact fee, I can see why. I personally stand to gain a windfall from these takings.

    But they offend my sense of justice, and they should offend others’ sense of justice, too. Who gives us the right, even if we are the voting majority, to take from the few to gain what we want without paying for it?”

    So, how many people’s sense of justice is likewise offended?

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  46. PhilBest (5,125 comments) says:

    RRM, it is not often that I admire a suggestion coming from you, but that one about developing the South Wairarapa was a good one, regardless of whether tunnels are a good idea or not. Were you sincere, or just trying to parody “pro-development right wingers”?

    I was getting around to this subject myself anyway. What I am saying about land use restrictions, applies just as much, or more, to regional authorities as it does to central government policy. Any one region of NZ could free up its land supply to attract both population and business, and could become NZ’s boom success story. Texas is booming as a result of businesses and population fleeing cost and regulatory squeezes in many other states of the USA. The phrases “ABC” and “GTT” in popular parlance in the USA, stand for “Anywhere But California” and “Gone To Texas”.

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  47. Mr Dennis (348 comments) says:

    PhilBest:
    I was talking about bare land prices. I meant the low initial bare land price was not the biggest benefit of building on poor agricultural land, as Owen had pointed out land is a minor proportion of the cost of any development. The ultimate goal of any policy should be lower prices for housing etc, and this is very important.

    There are large areas of low quality agricultural land that could be built on. Freeing up more of this land would lower house prices, to everyone’s benefit. But good horticultural soil, as on the fringes of our cities, is too valuable to put under houses. As cities expand we will need more food production, not less, so should preserve this soil for agriculture.

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  48. RRM (9,933 comments) says:

    Phil – no, I am 100% sincere in my enthusiasm for that scheme – though somehow I doubt we’ll ever see it…

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  49. RRM (9,933 comments) says:

    Insider – sadly my personal cash float for property investment is a few billion short at the moment. But given the banks are willing to finance 60,000 new homes in Dannemora and the new Botany Town Centre, presumably there would be ample private capital available for all of the privately-owned aspects (houses, retail, factories etc) and perhaps the big “public” works parts (motorway, bridge, tunnel, city streets, services reticulation etc) could be one of your vaunted PPPs?

    (In an earthquake, unless the fault that ruptures crosses the tunnel, then all of the material around the tunnel moves as one with the seismic earth motion and there are minimal consequences for the tunnel. It’s more your elevated highways a la SH1 Ngauranga to Wellington City that tend to collapse if the piers holding them up aren’t designed 100%)

    My point is, in the past ambitious projects have been required to keep up with the country’s population growth. How long has it been since the country has built a Roxburgh dam or a Hutt City or the like? It seems to me it is quite lucky we had more authoritarian governments in past times, that put all of this infrastructure in place that we now take for granted!

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  50. RossK (275 comments) says:

    What is never questioned is the desirability or undesirability of having individuals owning multiple residential properties. Clearly it would be both undesirable and stifling for the economy if one person owned all the houses and all the land in New Zealand. But it is, apparently, desirable for a section of our society to own many times the number of houses / sections it needs for its own occupation.

    This question of where the desirable limits are is one that the right are not good at answering. If one accepts, as most people do, that in the imperfect competition we have in the real world capital accumulation leads to increasing concentration of wealth in fewer and fewer hands, then every now and then it must surely be desirable for our economy to be “reset” to create the scope once again for people driven by capitalist impulses to make fortunes based on their own merit and effort rather than family advantage.

    Houses for example are an area where one could make a good argument that there should be regulation of how many houses a natural person can own – Shelter is one of the preconditions of a civil society and exposing the housing market to the unrestricted operation and vagaries of the free market would surely be agreed by all as ill-conceived. (Just as exposing the money market to the unrestricted operation and vagaries of the free market has been revealed as being unsound)

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  51. RossK (275 comments) says:

    I think “younger” people aren’t so much as apathetic as realistic. We don’t have the money or the wealth and we won’t get it by bleating to a generation that has looked after itself at every turn. All we can do is wait for the baby boomers to get to that age where suddenly they become irrelevant and then we will (hopefully) use our time in the sun to put in place far more equitable systems rather than falling prey to the urge to quickly feather our own nests. I often think that one of the undesirable consequences of our capitalist system (don’t get me wrong I am in favour of capitalism) is that it lends itself to the power being increasingly held by the elderly – a situation very much at odds with zoology (animal and human) where often although the older members of a group are kept around and respected for their knowledge and experience the power of decision making is assumed by the fittest and most able (which is normally related to physical prowess). If one reads about great scientists or mathematicians it is often written that the great discoveries and breakthroughs are made when they are in their twenties or early thirties at their latest. Yet all governance in our modern day societies is carried out by people in their fifties and sixties.

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  52. RossK (275 comments) says:

    Land is not productive. Only people are productive.

    That is a twat of a remark isn’t it. So the kalahari and gobi deserts, and the tundra wastelands of Russia and Canada, are just not being managed for best agricultural productivity??

    All those historians who link flourishing ancient societies with the lush agricultural land conditions in which they flourished are just crazy. All that study wasted.

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  53. PhilBest (5,125 comments) says:

    RossK, is it not an outstanding example of human ingenuity that deserts can and have been rehabilitated, especially in Israel and California?

    And RRM, we’d have to fall out somewhere on our broader agreement, wouldn’t we? Over the level of “Private” investment perhaps?

    Note the tendency these days for public authorities to sock the private sector with “development levies” and the like. Heck, if they expect the private sector to pay for infrastructure, why can’t they just butt out and let the private sector do the lot? Actually, in Texas, the private sector DOES do the lot even from the start point of incorporating a new municipality!

    But I’d love it we were largely in agreement. Bipartisan agreement, eh?

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  54. Viking2 (11,491 comments) says:

    There is a side to this debate that has not been canvassed as yet.
    Wander about and ask the older generation about how hard it was to buy a house, what size the house was ,what other possessions that they had when it came to buying the house and how much they earned. Usually they finished up with a small house about 90 sq mtrs, moved into the house with few possessions, didn’t own a car of any sort, and worked for 10 pound or less a week.
    Ask this generation about it and they want a house with at least 150 sq mtrs, in the right suburb,have all the latest and best possessions(you know all the toys and flat screens etc.), have access to credit that the older generation never had including being able to borrow up to 110% in some cases as apposed to 60% way back. On top of that they are starting much later in their lives to buy a house and as most older parents can tell you earn more money in a year than the older generation did in 20 years. And still they winge.
    The problem is not the tax rules, it is about the level of taxation.
    Its not the interest rates as they vary by about 2-3% over the long term.
    Its not shortage of land for there are plenty of sections for sale around the country.
    It is about the cost of regulation. A simple splitting of a large section into 2 smaller ones costs approximately $35000 in Tauranga. For a few lines on a bit of paper!
    It is about cutting your cloth to suit, i.e. forgoing the toys, working extra hours, weekends and so.
    It is about goals and attitude and doing whatever it takes to achieve that goal.
    And it isn’t instant which seems to be a major issue with Gen y.

    But then isn’t it normal for lazy Kiwi’s to blame everyone else for their own circumstances?

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  55. NeillR (351 comments) says:

    The one issue that hasn’t been addressed is the demographics of the baby boomer generation. Until the late 60’s house prices were relatively stable, but as boomers grew into adulthood suddenly the demand for housing grew proportionately. They became a self-fulfilling prophecy whereby the more they demanded the more prices rose so they bought more houses. All the while telling anyone who would listen that “you’ll never lose in property”.
    And as we approach 2010 and the impending retirement of the first boomers, we also have the possibility that they’ll start cashing up and downsizing. IMO we are about to witness the greatest deflationary period in housing for more than a century.
    House prices took off early this millenium on the back of a tsunami of money from middle boomers who were in their peak earning years. The finance markets were awash with money on deposit that was looking for a home. As the boomers begin to realise that their retirement nest eggs have gone, they will be scrambling around to salvage what they can for their retirement – hoping like hell that the boom in Asia will allow them to put their retirement on tick, to be paid for out of a RAM when they die.

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  56. Keithw (4 comments) says:

    The Downsizing causing a reduction of prices is a possibility, however the downsizing could also be a market spitter
    – the larger houses flood the market, due to the boomers wanting smaller places
    – While the smaller places come under increased demand, as they are wanted by boomers. first home buyers & investors.
    Just the same as has happened with Cars- now is a great time to buy a V8 if you can afford the running costs.

    Some of the demand for smaller houses may be filled by the same boomers selling off some of their rentals, but if a selloff starts causing a drop, then the selling will simply stop (presuming the boomers are choosing to sell, not having to sell)
    Of course some may even have bought a rental with the intention of living in it themselves later, in which case they will choose the appropriate time to sell the larger house.

    So 2010 will be significant, but is probably as likely to be another boom as it is to be a bust.

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  57. uk_kiwi (74 comments) says:

    Viking2- The older generation had it better in lots of ways- a family could afford a house on a single income, low interest government loans were available, the banks were regulated so they could not irresponsibly lend to speculators, and there was a genuine interest in helping young families into their own homes as the decent thing to do. Houses were less than 3x income.

    Contrast that with today, where the payments on a median house eat up 80% of a median income, you really need two median incomes to live on and having children is not an option if you want to afford a house. There is no interest in helping young families into their own homes- only the greed of the property speculators who often own 10 or 100 houses each. Houses are 6-8x income.

    The great irony is that through the LAQCs and lack of capital gains tax, the younger generation is effectively subsidising the very people pricing them out of housing, as the overall tax burden is shifted from property speculators to PAYE taxpayers.

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  58. PhilBest (5,125 comments) says:

    UK KIWI, you forgot to mention that mortgage interest on your first home was tax deductible, for our parents generation. Great post in any case.

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  59. RRM (9,933 comments) says:

    Which older generation? My parents (now in their 60s) had a first mortgage at something like 24%.

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  60. OECD rank 22 kiwi (2,752 comments) says:

    It’s funny watching people sweat the cold stuff as all their equity in their newly purchased(and over priced) houses disappears. Slowly it dawns on them that the music has stopped and they are left holding the parcel. Only problem is that instead of making a quick fat profit they are instead staring down the barrel of negative equity and personal bankruptcy. (The parcel contains poop, not cash) Nice.

    The only way that situation gets better is if the above described people have just started a young family and are “BLUDGING FOR FAMILIES” welfare recipients. They started off thinking that “other people” could pay for their mortgage and kids and now they realise they’re trapped in financial oblivion. Couldn’t happen to a more deserving class of people. Enjoy the misery that keeps on giving!

    That’ll teach them to vote Labour. Ha, ha, ha ,ha!

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  61. OECD rank 22 kiwi (2,752 comments) says:

    Maybe the Government should print the names of all these “BLUDGING FOR FAMILIES” losers when they lose the family home and end up sending their family to the poor house. Oh that’s right, they already do that. The bankruptcy notices are printed in the public notices of all the main newspapers. Happy reading!

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  62. OECD rank 22 kiwi (2,752 comments) says:

    Can you actually believe these “BLUDGING FOR FAMILIES” losers thought that taxpayers owned them a living just because they had kids? What goes around comes around. The good thing is they are stuck in a poverty trap where they know precisely what income they are going to earn for the next eighteen years. They have no way to get ahead because the marginal effective tax rates eliminate any additional income they “earn”. If they are lumbered with a house in negative equity, they are unable to sell up and move to Australia to earn a decent income. Mean time prices continue to rise, New Zealand fails to earn its own way in the world and the standard of living in New Zealand continues to fall.

    All the former New Zealanders who took the sensible rational approach and permanent migrated overseas to better incomes and better standards of living look back at the fate of New Zealanders silly enough to stay in New Zealand and laugh, hard.

    That’s of course if the permanently migrated former New Zealanders are looking back at New Zealand at all, even for entertainment purposes. :D

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